Buffett offers to reinsure $800 billion in muni bonds

NEW YORK (Reuters) - Warren Buffett said on Tuesday that he had offered to reinsure $800 billion of muni debt guaranteed by bond insurers, but shares in MBIA Inc (MBI.N) and Ambac Financial Group Inc ABK.N slid as investors recognized that the billionaire investor’s plan was far from a panacea.

Warren Buffett, chairman and CEO of Berkshire Hathaway, pictured on Capitol Hill in Washington, November 14, 2007. Buffett on Tuesday told CNBC television he offered to take over liabilities for other monoline bond insurers in a plan that would cover $800 billion in municipal bonds. REUTERS/Jason Reed

Berkshire Hathaway Inc’s (BRKa.N) chief executive told CNBC television that he had extended the offer to MBIA, Ambac and FGIC Corp, and so far one of the three had rebuffed him. The reinsurance would cover about a third of the $2.4 trillion of debt guaranteed by U.S. bond insurers.

Investors said the bond insurers had good reason to reject the offer. Buffett said he would charge premiums of 50 percent above what the bond insurers are receiving from issuers on the policies, which many analysts saw as a high price.

Buying the coverage from Buffett would leave insurers with fewer safe assets to offset risk from their toxic ones.

“We would be delighted if this transaction occurred,” said T2 Partners LLC Managing Partner Whitney Tilson, whose firm has bet against MBIA and Ambac through short sales. “It would enrich Berkshire Hathaway and impoverish MBIA and Ambac.”

Still, the broad stock market welcomed the offer, which allayed fears that the bond insurers’ difficulties would force investors to sell billions of dollars of tax-exempt municipal bonds. Any forced sales could depress bond prices and lift borrowing costs for cities and consumers.

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Equities rose, and U.S. Treasury bonds dropped, implying that investors were more willing to buy risky assets. But MBIA shares fell 15.3 percent to $11.50 on the New York Stock Exchange, while Ambac dropped 15.1 percent to $8.90.

Bond insurers are expected to make billions of dollars in payments in the future after guaranteeing bonds like collateralized debt obligations (CDOs), subprime mortgage securities, and other risky debt.

These expected payouts have spurred ratings agency Fitch to strip Ambac and FGIC’s main insurance units of their top triple-A credit ratings. Standard & Poor’s has also cut the FGIC unit’s ratings.

Buffett said reinsurance would shore up municipal bonds, but would not help the CDOs.

“I’m not sure anything is going to do much for the CDOs,” Buffett said.

WRITE-DOWNS AND HEARTACHE

A bank group is working to rescue Ambac’s main insurance unit, and a second group is trying to rescue FGIC’s main unit. Both groups are hoping to keep the businesses intact, but if necessary, the good muni business could somehow be separated from the bad CDO and structured finance business, a person briefed on the matter said.

Eric Dinallo, New York’s insurance superintendent, is working with banks on possible solutions.

Following news of Buffett’s offer, Dinallo said in a statement on Tuesday: “I am pleased this provides one more option to protect muni bond issuers and investors.”

Buffett would not say which bond insurer had turned down his offer, but CNBC later reported that the refusal came from Ambac.

The offer comes after Buffett started selling municipal bond insurance himself, which he is trying to get approval to do in all U.S. states.

Getting approvals may take time. That, combined with working with rating agencies to get top ratings, means that buying into a bond insurance business probably makes more sense than starting one up, Wilbur Ross told Reuters on Monday. Ross is looking at investing $1 billion in a bond insurer.

Buffett’s offer includes a 30-day clause to allow the bond insurers to come up with a better deal.

Ambac had guaranteed a total of $524 billion of debt as of year end, while MBIA insured $679 billion. FGIC insured $314.8 billion as of September 30.

Among U.S. bond insurers, about two-thirds of their exposure is related to municipal debt, and about a third is structured finance like CDOs, according to Fitch.

Write-downs have eaten into the insurers’ capital and endangered the top credit ratings that are crucial for their business.

Ratings downgrades are bad for bond insurers, but may be even worse for credit markets. If bond insurers lose their “triple-A” ratings, the securities they guarantee would also be downgraded, and investors that can only hold top-rated assets would be forced to sell their insured holdings.